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April 24, 2011

The Trading Week: Apr. 25 - Apr. 29

Apr. 23, 2011 (Allthingsforex.com) – Will the Fed change the direction of the market and stop the assault on the U.S. dollar by taking a step towards exiting its ultra-accommodative monetary policy, or will the U.S. central bank maintain the status quo and echo the familiar “extended period” statement? These will be the questions heavy on traders’ minds in a busy week ahead, as all eyes focus on the Federal Open Market Committee monetary policy meeting, along with the preliminary estimate for Q1 2011 growth in the world’s largest economy.

In preparation for the new trading week, here is the outlook for the Top 10 spotlight economic events that will move the markets around the globe.

1. USD- U.S. New Home Sales, an important gauge of housing market conditions measuring the number of newly constructed homes with a committed sale during the previous month, Mon., Apr. 25, 10:00 am, ET.

Following the better-than-forecast existing home sales, the U.S. new home sales are also expected to register an increase by up to 280K in March from 250K in February. Recent housing data has offered a glimpse of hope from the U.S. housing market, but there is still a long road ahead to recovery.

Despite of rising oil and food prices, the U.S. consumers are forecast to remain optimistic as the confidence index inches higher with a reading of 64.5 in April, compared with 63.4 in the previous month.

After a strong rise in producer prices, the consensus forecasts are pointing to a spike in consumer inflation by 1.2% in the first quarter from 0.4% in Q4 2010, which could raise the odds that the Reserve Bank of Australia could consider a resumption of last year’s campaign of interest rate hikes.

The U.K. economy is expected to return to growth in the first quarter of 2011 with a preliminary GDP estimate of 0.7% q/q, compared with the 0.5% contraction in the fourth quarter of 2010. An improvement in the U.K. economy could create a more comfortable environment for a long-anticipated rate hike by the Bank of England.

If the recent comments from regional Fed presidents were any indication that the Fed could exit their ultra-accommodative monetary policy sooner than expected, then what should we make of the news that Chairman Ben Bernanke will start to hold press briefings following the four two-day Fed meetings this year, beginning on April 27? Is this an effort to offer more transparency, or is it yet another way for Mr. Bernanke to keep reminding the markets of his resolve to “stay the course”? Although the Fed is likely to maintain the policy of keeping rates low for “extended period”, if next week’s meeting brings a more optimistic outlook on the economy, coupled with an acknowledgement that the recovery is on a stronger footing and that “the risks to forecasts of inflation had shifted somewhat to the upside”, this could be a potential hint of a growing consensus among policy makers about the need to tighten credit. The U.S. dollar could get a significant boost, should the Fed’s statement contain any hints of an early exit or a reduction in the size of the quantitative easing program. On the other hand, a dovish Fed could give a green light for the continuation of the assault on the greenback.

In the aftermath of the February Christchurch earthquake which caused a devastating damage and disrupted economic activity nationwide, the Reserve Bank of New Zealand cut rates aggressively by 50 bps. Weaker economic growth and subsiding inflationary pressures in the first quarter of 2011 should keep the central bank on the sidelines by maintaining the current 2.5% level for the benchmark interest rate at this meeting and possibly in the next few months.

As rebuilding efforts continue after the terrible earthquake and tsunami, Japan’s central bank could be forced into further monetary policy easing, despite of rising commodity prices. The Bank of Japan is the least likely candidate to consider tightening and is expected to keep the benchmark interest rate in its record low target band between 0% and 0.10%.

9. USD- U.S. GDP- Gross Domestic Product, the main measure of economic activity and growth in the world’s largest economy, and U.S. Jobless Claims, an important gauge of employment trends and labor market conditions, Thurs., Apr. 28, 8:30 am, ET.

Besides the Fed’s interest rate decision, this would be the second-most important economic event of the week, bringing the preliminary estimate for the Q1 GDP which is forecast to show the U.S. economic growth slowing to 2.0% in the first quarter of 2011 from 3.1% in Q4 2010. Following last week’s jump to 403K, initial jobless claims are expected head lower with a reading of 392K.

The European Central Bank’s preferred inflation gauge is forecast to stay above the 2% comfort level with a preliminary flash estimate of 2.7% y/y for May. Elevated inflationary pressures in the Euro-zone could keep the EUR supported on expectations for further ECB rate hikes.